Australia | Jul 28 2006
By Chris Shaw
The old sales pitch of "There’s no other store like David Jones (DJS)" is proving at least somewhat correct, the company yesterday revising up its earnings guidance for FY06 to a range of $79-$81m.
As a result the brokers have followed suit and lifted their estimates, Smith Barney Citigroup noting the stronger earnings reflect a combination of faster sales growth, lower advertising spending and cost savings from a renegotiated labour agreement.
The broker has lifted its EPS forecast for FY06 by 4% as it has increased its profit forecast to $80.8m, the better performance expected to flow through into coming years also. It has increased its FY07 EPS estimate by 2.3% to 20.7c and in FY08 by 5.3% to 22.1c, the larger increase reflecting new store openings that year.
It sees the biggest positive from the increased guidance being it was unexpected, meaning the company should enjoy some additional operating and margin leverage, the broker estimating the margin increase has been about 1.1%.
ABN Amro also estimates the margin increase as 1.1%, and has similarly lifted its profit forecasts. In FY06 it has increased its estimate by 5.6% to $80.7m in line with management’s revised guidance, while in FY07 its forecast is up 2.5% to $84.4m and in FY08 by 0.6% to $89.8m. This represents earnings per share of 19.3c and 20.3c in those years.
The broker suggests there is some question as to whether the margin increase is sustainable though as it appears to be a reflection of lower operating costs, so it continues to rate the stock as Hold, as does Citigroup.
UBS also rates the stock as Neutral but suggests the story is now becoming more interesting as the sales result was a good one in the face of Myer’s clearance sales. The broker also sees potential earnings upside from a higher than expected increase in new store openings, suggesting this could add as much as 10% to its EPS estimates in future years.
Its EPS estimates have been increased to reflect management guidance, with FY06 up 5.5% to 19c and FY07 and FY08 both up 2% to 20c and 23c respectively.
The most negative view comes from Credit Suisse, who while also lifting its numbers in line with guidance continues to rate the stock as Underperform on the basis the current upside is already in the share price.
It suggests the department store operations are now mature, while the efficiency programs are well advanced and so offer limited further gains. It also suggests given margins and returns are at historically high levels, the risk remains to the downside.
The FN Arena database shows Credit Suisse has the only negative rating on the stock among the leading brokers and equity researchers, the company also being rated as Outperform twice and Hold six times. The average target price is $2.99, which compares to the median price target noted by Thomson One Analytics of $2.90. Median earnings per share estimates are 18c in FY06, 20c in FY07 and 21c in FY08.
David Jones share closed yesterday at $2.97.